No Honeymoon for Japan's New Leader

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Indeed, while the LDP has won praise for cutting the huge spending on public infrastructure projects by about half since 2001, many of Fukuda's backers in the LDP are opposed to further fiscal and economic reforms. Following his victory on Sept. 23, the Nihon Keizai, a business daily, noted that "in light of his low-key personality and cautious political style, the structural reforms pursued since the Koizumi government will be subjected to a more leisurely pace."

Others are more sanguine, noting that the change of prime minister will only have a marginal impact on business. Speaking after Abe resigned, Richard Jerram, chief economist at Macquarie Securities (MQBKY) in Tokyo, noted that whoever takes over, in the short term, the status quo is likely to be maintained. "It's hard to see how this could be bad news. It probably does not make much difference to policymaking," saidJerram.

Koizumi Return?

What is clear, though, is that few Tokyo watchers expect Fukuda's reign to be long-lasting. Under the terms of his victory for the presidency of the LDP, Fukuda can stay on as chief until September, 2009. But given the LDP's perilous position in the polls, an early election is more likely.

Masaaki Kanno, chief economist at JPMorgan (JPM) in Tokyo, predicts a general election could take place in summer, 2008, either shortly before or after the G7 summit to be held in Toyako, Hokkaido, Japan's northern island. "The new government needs to be tested by the general election to show their credibility," he says.

That's left some betting that a poor showing by the LDP could lead to a surprise return for Koizumi, 65. Speaking in Hong Kong on Sept. 19, CLSA analyst Stefan Rheinwald predicted that Koizumi will return next year, noting that the charismatic former prime minister "is one of the few politicians with the vision and creativity to push the country forward."

One scenario would be for the LDP, after a weak election showing, and the DPJ to eventually split into new pro-reform and anti-reform parties with Koizumi becoming leader of the former. Of course, that would all depend on Koizumi's willingness to return. "At any event, the next cabinet will be an interim administration," says Hokkaido University's Yamaguchi.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.
With Hiroko Tashiro in Tokyo.